Asset Management & Investment Funds: Irish Practice Developments – Mar 2022
CBI letter on effectively managing risks arising from the Russian invasion into Ukraine
The Central Bank of Ireland (CBI) issued a letter to Fund Service Providers (FSPs) (including fund management companies (FMCs) fund administrators and depositaries), in relation to the ongoing Russian invasion into Ukraine.
The CBI expects the letter to be brought to the attention of all members of the Board of the FSP, Fund, relevant Pre-Approved Control Function (PCF) holders and other relevant responsible persons.
The contents of the letter should be taken into account as FSPs respond to unfolding events, particularly with respect to financial sanctions, valuation of funds, liquidity management and dealing arrangements.
- On financial sanctions, the CBI expects FSPs to take timely action, with heightened precautions, to ensure that no breaches of sanctions occur. The CBI notes that this is a complex and changing environment and references the freezing and reporting obligations.
- On valuation, liquidity and fund suspensions:
- FMCs are reminded of their obligations for the proper valuation of the assets of the fund and the potential for impaired valuations (for example: stale pricing, unavailability of prices, or prices which are objectively not reliable). FMCs must ensure valuations appropriately reflect the impact of current market conditions (where certain asset-classes are subject to pronounced devaluation and / or their ability to trade has been wholly impaired).
- CBI expects FMCs, relevant PCF holders and other relevant responsible persons, on an ongoing basis, to assess the liquidity position of each fund under management to ensure that the liquidity of the investment portfolio remains in line with the fund’s redemption policy and takes into account the potential redemption demands of investors.
- FSPs are reminded of their obligations in respect of regulatory reporting and engagement with CBI.
- CBI also reminds depositaries of their fiduciary obligations in relation to funds to which they are appointed.
Prohibition on selling units/shares in certain Funds to Russian persons after 12 April 2022
EU sanctions regulations issued on 25 February 2022 introduce a prohibition on selling units in certain funds to a broad section of Russian related investors, including many that are not named on sanction lists.
This prohibition will present significant new operational challenges for impacted Firms. Read more
The CBI has a dedicated webpage where supervised entities can access relevant information on changes to the Russia/Ukraine Regulations (last updated on 24 March 2022).
The European Commission set up a dedicated webpage, entitled Sanctions adopted following Russia’s military aggression against Ukraine, which contains information on the various sanctions adopted, including Frequently Asked Questions. The page is regularly updated. Therefore, natural and legal persons are encouraged to regularly visit this page for the latest information, in particular before contacting the CBI with queries relating to sanctions adopted in this regard.
Irish Funds met with CBI regarding the implications of Russian sanctions. The CBI are monitoring developments, are in contact with their peer regulators and are open to hearing from firms with potential solutions that benefit investors. The CBI encourages firms to maintain a dialogue with their supervisors.
Irish Funds also produced a briefing document looking at the impact of the war in Ukraine on various issues including trading and settlement, liquidity, valuations, SWIFT and operational issues
Please speak with your usual contact in the Asset Management & Investment Funds team if you would like more detail on this topic.
ESMA collects queries on scope and implementation of financial sanctions so that the European Commission can provide clarity on issues.
CBI explainer for consumers on cryptocurrencies with a warning on investing in crypto-assets
The CBI issued a warning on investing in crypto-assets here.
This is part of a European-wide campaign by the European Supervisory Authorities.
The CBI also published a plain English explainer for consumers on cryptocurrencies.
The CBI emphasised that crypto assets are high risk and speculative, and may not be suitable for retail customers. In particular people need to be alert to the risks of misleading advertisements, particularly on social media, where influencers are being paid to advertise crypto-assets. “People should also be aware that if things go wrong, you do not have the protections you would have if you invested in a regulated product.”
This CBI warning follows the ESA's recent warning to consumers on the risks of investing in crypto-assets.
The CBI also referenced the ESMA Statement on Investment Recommendations on Social Media (October 2021).
CBI financial regulation priorities
CBI Director General, Financial Conduct, Derville Rowland set out the CBI's 2022 financial regulation priorities. Items of particular note included the following.
- At European level,
- development of a macro-prudential framework for funds, noting that the need to develop and operationalise a complete macro-prudential framework for investment funds is clear, and CBI will continue to play a leading role in working with our international counterparts to develop such a framework as a priority
- progressing the AIFMD review. Striking the right balance, particularly in relation to reporting requirements around delegation arrangements will be important
- progressing the capital markets union
- helping shape the overhaul of European AML/CTF structures
- On governance, progressing the introduction of the Individual Accountability Framework (IAF)
- Cyber-resilience is particularly pertinent now. IT and cybersecurity risks are a key concern for the CBI. "Boards of firms should have an excellent picture of the risks their organisations are facing and how they are actively working to mitigate them."
- Key risks across sustainable finance, governance, conflicts of interest, market dynamics, cyber security, data & financial innovation and misconduct were highlighted in the CBI's securities markets risk outlook report (discussed in our February bulletin). Supervisory requirements and expectations were set out
- AML/CTF will be an area of core focus this year, and indeed for the foreseeable future.
- The CBI aims to create the regulatory context in which the potential benefits of innovation for consumers, businesses and society can be realised, while the risks are effectively managed. “Crypto-assets comprise another area where the European regulatory framework must be strengthened to prevent fraud and real risk to investors, both institutional and particularly retail"
- “We will also continue to step up our work on climate change to both ensure the financial system can support the transition to a carbon neutral economy and is suitably resilient to the risks." The speech referenced the CBI's "Dear CEO" letter on climate and ESG issues setting out supervisory expectations in this area" (discussed in our November bulletin)
- "As my colleague Ed Sibley has noted, it is worth us reflecting on how we think about future events that have a near certainty of occurrence over time, but with some doubt about precise timing and impact. In other words, how well do we prepare for predictable surprises?"
The CBI Strategy can be accessed here.
CBI Markets Update
The CBI published issue 2 of 2022 of its Markets Update, which included:
- CBI updated communication on Covid regulatory flexibility for Securities Markets, Investment Management, Investment Firms and Fund Service Providers where the CBI removed measures that have expired.
- The CBI updated its “Publication of national provisions governing marketing requirements for AIFs" webpage to include CBI requirements where an AIF situated in another jurisdiction proposes to market its units in Ireland to retail investors.
- Product intervention: BaFin consultation on prohibiting the marketing, distribution and sale of futures with additional payments obligations to retail clients in Germany
- “The spirit in the machine: considering evolving financial regulation" – Remarks by Gerry Cross, Director of Financial Regulation – Policy Risk, at the Compliance Institute
- Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Investment Firms) (Amendment) Regulations 2022 effective from 21 February 2022 These Regulations align general reporting requirements for MiFID investment firms with the classification of MiFID investment firms under Directive (EU) 2019/2034.
- Industry Communication related to Fund Service Providers effectively managing risks due to the Russian war in Ukraine - industry communication (discussed above). The CBI will have regard to the contents of this letter as part of future supervisory engagements or any other action, including enforcement action, it might take.
CBI and IOSCO report on retail market conduct issues
The International Organization of Securities Commission’s (IOSCO) Retail Market Conduct Task Force, co-chaired by the CBI and the Australian Securities & Investments Commission, has published the Retail Market Conduct Task Force Report: Consultation Report (PDF).
The report examines the evolving global retail investor trends and their implications for market conduct. Among other issues, it examines the reasons for, and regulatory and market implications of, increasing gamification, self-directed trading and the influence of social media on retail investor behaviour.
The findings of the report are largely based on a comprehensive survey that IOSCO conducted in 2021 and public information issued by IOSCO members.
For more information please contact a member of the Asset Management & Investment Funds team.
Date published: 6 April 2022